US ratings downgrade sees yields edge higher

We’ve seen a bit of a consolidation in stock markets after the gains of last week, with the rise in bond yields adding some complications to the wider outlook, after Moody’s ratings agency became the last ratings agency to remove the US Triple A credit rating to AA1, albeit with a stable outlook.

A lot has been made of this downgrade by Moody’s; however, it’s been the last man standing when it comes to the US for years, and its AAA rating given that Fitch downgraded the US in 2023, and S&P did so in 2011.

The reality is it’s been a long time coming, with Moody’s warning the US was at risk at the end of last year.

It’s more surprising that it hasn’t come before now, and consequently I think this is the perspective that is needed now rather than the narrative we’ve been hearing this week.

Does it mean that the US is suddenly a riskier bet than it was this time last week, even accounting for market anxiety about Trump's “Beautiful” tax bill, which has passed its first hurdle in the House. In a word, No.

Again, framing here is key, this isn’t a case of tax cuts per se, it’s about extending the cuts first brought in during Trump’s first term, or alternatively preventing a big tax rise on the US economy, when these tax cuts expire, at a time when the US economy is slowing.

We’re about to find out here in the UK the effect large tax rises have on business investment and employment, and which could herald a sharp slowdown in economic activity in the coming months.

Is that what we want to see in the US? By all means talk about the risks of a ballooning deficit in the context of sustainability, but can we frame it correctly please.

It’s not about tax cuts, but raising tax levels back to 2017 levels.

Furthermore, the US is hardly alone when it comes to concerns about its debt profile, with concerns growing about Japan’s debt situation also becoming more mainstream, although given that the Bank of Japan owns a large chunk of Japanese debt, I’m not sure that is as big a problem as has been suggested.

We have a similar problem here in the UK on the debt front, where the current government appears intent on leading the economy into a crisis, and there are also concerns across the Channel about the French economy, and its growing deficit.

As far as markets are concerned the DAX continues to look resilient, however as far as the US is concerned the picture doesn’t look as clear cut.

Sure, the Nasdaq 100 and S&P 500 have both recovered above their 200-day MA’s but the Dow and Russell 2000 have not.

That, along with the Nikkei 225 also struggling at similar levels keeps the risks somewhat 2-sided when it comes to further gains.

We have seen some moves higher in yields, with some notable moves in the long end in the US and Japan.

Yields in the UK aren’t helping either with the UK 5-year yield back near 4.2%, having been below 4% when the Bank of England cut rates earlier this month. So much for rate cuts keeping borrowing costs down, although banks have been quick to cut savings rates.

More improvements on bank net interest margins incoming methinks in the next quarter.

This week saw UK inflation surge in April to 3.5%, up from 2.6% in March, who could possibly have seen that coming, with core CPI rising to 3.8%, and services inflation rising to 5.4% from 4.7%.

The old RPI index also saw prices surge rising to 4.5% from 3.2%. The hope is that this may well be the high point for inflation however according to the ONS businesses have told them that they could well be forced to raise prices further to deal with the additional burden of costs heaped on them by the increase in taxes, as well as other related costs in April. This means that any further rate cuts by the Bank of England may be hard to achieve much before Q3.

The only silver lining was a slowdown in energy inflation which has continued to fall, albeit at a slower pace. Retail sales also came in strong for April largely due to the warmer and drier weather which appears to have prompted a larger spend in food stores, as well as household goods stores, BBQ weather anybody? Curiously sales of clothing slowed despite recent results from Next showing that spending here was brought forward from Q2.

Public sector borrowing on the other hand was ugly, coming in higher than expected at an eye watering £20.2bn, more than £2bn above forecasts. Another win for this wonderful government of ours.

On the plus side company results have continued by and large to paint a relatively upbeat picture despite the pessimistic outlook.

This week  

JD Sports full year results saw the shares slip initially after reporting a 2% slowdown in like-for-like sales for Q1, with the US bearing the brunt with a 5.5% fall.  

On the numbers, full year revenues rose 10.2% to £11.46bn, with profits before tax, sliding 11.8% to £715m, when taking into account adjusting items. Operating margins slipped back to 8.2% from 9% all in line with forecasts.

Proposed final dividend of 0.67p per share, taking total dividend to 1p, an increase of 11.1%, with a share buyback of £100m due to be completed by July.

Organic sales growth of 5.8% was in line with expectations, however trading in the new year has got off to a slow start, particularly in the US, where the retailer has shown a reluctance to cut its prices.

This could be a problem given that its US operation is now much bigger due to its Hibbert acquisition, and now accounts for the biggest region when it comes to overall sales, putting it firmly in the cross hairs of the tariff wars given most of its goods get imported from China and Vietnam.

This may dent expectations for profits this year which are currently in the area of £890m.

Marks and Spencer FY 25 – there wasn’t much to dislike about M&S full year results, however a lot of the good news was overshadowed by the recent cyber-attack which has seen M&S suspend its online delivery business.

On the numbers themselves profit before tax and adjusting items was up 22.2% at £875.5m, a 15-year high, with statutory revenues seeing a 6.1% increase to £13.8bn.

After adjustments and a £363.7m impairment in respect of Ocado Retail and

Food sales rose 8.7% to £9bn on a margin of 5.4%, generating an adjusted operating profit of £484.1m, an increase of £95m on 2024.

On the GM business there was similar outperformance with a 3.5% increase in sales to £4.2bn, and adjusted operating profit of £475.3m, an increase of £38m. The full year dividend saw an increase of 20% to 3.6p. 

On the cyberattack M&S said it had created significant disruption which could well continue until June and July with the consequence that group operating profit for 2026 be impacted to the tune of £300m, although this could be reduced with savings elsewhere in the business.

The shares have rallied modestly since the update, despite the downgrade to profits in 2026, however there is a concern that the effects could be longer lasting, if customers don’t return to the brand over the next 12 months.

The wider question is what this means for retailers in general when it comes to cyber-attacks, given the M&S isn’t alone in falling victim.  

Is there any effective litigation to these types of attacks given that the method used to access M&S systems is something they have little control over, given the hackers gained access by way of a third party.

This is likely to present challenges across the whole of the retail sector, as these types of fraud become more sophisticated, with something called SIM swapping believed to be behind the M&S incident as this can circumvent 2FA if someone gains control of your handset.  

The share price reaction to the full year numbers from Vodafone was a little strange to say the least. Full year revenue saw an increase of 2% to €34.7bn, helped by a 2% increase in organic service revenue of 5.1%.

The debt position has also improved, falling by €10.8bn to €22.4bn, as a result of the long overdue sales of the Italian and Spanish businesses, with the company also announcing a €2bn share buyback.

The elephant in the room remains the business in Germany, which continues to act like a ball and chain around the wider business. Having already thrown €20bn into it already, the company posted an annual loss of €3.7bn due to having to book a €4.4bn impairment on its business there.

While the loss was couched in optimism that the situation in Germany would be much better in 2026, and while I would like to believe CEO Margherita Della Valle, that message is becoming a little old, although if you say it enough times at some point it may well happen.

Given that Germany accounts for 33% of the business cash flow and an expectation that revenue growth in this region will improve it appears that markets are giving the company the benefit of the doubt. Now the company needs to deliver as the shares head towards their 2024 peaks of just below 80p, which has capped any attempt to rebound for the last 2 years. 

There is more optimism over the UK business with the merger with Three set to complete in the next few weeks.

For 2026 Vodafone was bullish, saying they expect underlying cash profits of between €11bn and €11.3bn and underlying free cash flow of between €2.6bn and €2.8bn, however it was the 2025 numbers which caught the eye, after another poor performance from the business in Germany.  

Decent set of full year results from BT Group as it released its full year numbers, the shares initially dipped before rebounding, with the numbers coming in line with expectations.

Full year revenue was down 2% at £20.36bn, however profits after tax rose by 23% to just over £1bn, with the dividend rising to 8.16p per share, with a final dividend of 5.76p per share.

The biggest decline in revenue came in its business division, down 4% to £7.8bn, however Openreach saw a 1% increase to £6.15bn. Consumer was down 1% at £9.7bn.

On the outlook BT said the full fibre rollout was continuing apace, and that the company was raising its build target by 20% to up to 5m UK premises in FY26, on top of the 18m already delivered, and 6.5m connected.

The company said it was on target to deliver £3bn normalised cash flow by the end of the decade. Full year adjusted group revenue of circa £20bn, with UK service revenue of between £15.3bn to £15.6bn, which is slightly lower than this year’s £15.58bn.     

 easyJet shares slid back despite reporting an 8% increase in H1 revenues of £3.5bn and a loss of £394m, which was higher than last year’s £350m, thus wiping out the improvement seen in the Q1 numbers. It’s clear that Q2 proved to be more challenging profits wise than Q1. This appears to have been due to an increase in costs as well as what management called “price stimulation”. That’s price cuts to you and me. 

This was broadly in line with forecasts and came at the end of what has been a decent last few weeks for the share price, having seen a rise from lows of 401.3p back in April to the highs of this year earlier this week of 572p.

On the numbers –

Passenger revenue was up 5% at £2.16bn, ancillary revenue up 7% to £978m, and holidays revenue up 29% to £400m, pushing group revenue up to £3.5bn, an 8% increase.

The airline maintained its positive outlook for the year, saying it is on target to hit its medium-term target of more than £1bn in profits before tax looking beyond 2025.

For this year Profit before tax is expected to come in around £703m.

Forward bookings for Q3 currently 80% sold, and Q4 42% sold.

EasyJet holidays - forward bookings for H2 currently 77% sold with 25% customer growth expected, and is on target for early delivery of the medium target of circa £250m profit before tax.